Australian Housing Outlook Prepared by BIS Shrapnel for QBE October 2014

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1 Australian Housing Outlook Prepared by BIS Shrapnel for QBE October 2014

2 DISCLAIMER: The information contained in this publication has been obtained from BIS Shrapnel Pty Limited and does not necessarily represent the views or opinions of QBE Insurance (Australia) Limited (QBE). This publication is provided for informational purposes only and is not intended to constitute legal, financial or other professional advice and has not been provided with regard to the investment objectives or circumstances of any particular reader. While based on information believed to be reliable, no guarantee is given that it is accurate or complete and no warranties are made by QBE as to the accuracy, completeness or usefulness of any of the information in this publication. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) (if any) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The information referred to may not be suitable for specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgment. Recipients should obtain their own appropriate professional advice. Neither QBE nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This material may not be reproduced, redistributed, or copied in whole or in part for any purpose without QBE s prior expressed consent. QBE Insurance (Australia) Limited ABN AFS Licence No

3 Table of Contents Introduction 5 1. Executive summary 6 2. Economic outlook 7 3. Buyer activity Rental markets Yields Housing affordability Demand Capital city overviews and price forecasts Appendix 54

4 4 Australian Housing Outlook

5 October Introduction With the housing market remaining a key part of the national focus, I m delighted to share with you the latest Australian Housing Outlook report. The report, exclusively researched and compiled by BIS Shrapnel for QBE, analyses the drivers within the housing market and provides a forecast of trends over the next three years. The Australian housing market continued its trend of growth in 2013/14. Despite moderate gross domestic product performance and a softening resource sector, domestic economic conditions (particularly interest rates) upheld the national appetite for property. BIS Shrapnel has forecast a continuation of growth within the housing market in 2014/15, though increases will be more balanced across state capitals than in the previous year. Housing stock deficiency is set to remain a key indicator of growth in 2014/15, especially in Brisbane (7.4%) and Sydney (7.2%). Moderate increases are projected for Melbourne (3.3%), Adelaide (2.8%), Perth (0.9%), Hobart (2.6%) and Darwin (1.5%), while Canberra (-0.9%) will experience a slight decline. Market demand has been sustained with interest rates remaining at historically low levels. While we re seeing new dwelling commencements currently exceeding average underlying demand in most states, it s forecast that new supply will take some time to address tight vacancy rates and change the pattern of price rises. BIS Shrapnel is projecting that affordability at current interest rates can accommodate further price growth. Increasing market activity is most visible among non-first home buyers and in residential investment, with first home buyer demand affected by available state incentives. We have been committed to the mortgage industry for over 45 years. Our Financial Institutions team continues to innovate and provide products and services to ensure lenders have the confidence they need to help Australians achieve the dream of home ownership as soon as practicable. Our sponsorship of the Australian Housing Outlook, for more than a decade, reflects our ongoing commitment to deliver insights into the trends in the mortgage industry. I hope you enjoy this year s report and the insights it provides into some of the key changes and influencers driving our housing market into the future. Jenny Boddington Chief Executive Officer QBE LMI

6 6 Australian Housing Outlook Executive Summary There was a mixed performance across the capital city residential markets over 2013/14, with low interest rates driving sizeable median house price growth in Sydney (+17%) and Melbourne (+20%), as well as strengthening price performances in Brisbane (+6%), Adelaide (+5%), Canberra (+6%) and Hobart (+9%). The rate of price growth slowed in Perth (+2%) and Darwin (+1%). Resource investment in these states appears to have peaked and economic growth is likely to weaken, thereby impacting on house prices. Demand is largely being underpinned by upgraders and high levels of residential investment. Outside of Western Australia, South Australia and Tasmania, where recent downgrades of first home buyer incentives for established dwellings have created a temporary rush to beat the changes, first home buyer demand has contributed little to the other states growth/ housing market in 2013/14. With relatively solid price growth forecast in 2014/15, rising new dwelling construction and interest rates at stimulatory levels, the momentum is forecast to continue. However, the combination of further price growth, an easing of the dwelling deficiency and a forecast tightening in interest rate policy beyond the next 12 months will eventually cause price growth to slow in the residential market across most cities from 2015/16. Median house price growth over the next three years is forecast to be strongest in Brisbane (+17%), where a supply deficiency is likely to remain in place for much of the period. Further growth is forecast in Sydney (+9%), Melbourne (+5%), Adelaide (+6%) and Hobart (+5%). However, these markets are forecast to experience either a decline in their dwelling deficiency or a rising oversupply through to 2016/17, while the rate of price growth is forecast to progressively slow, or even decline, as interest rates reach a forecast peak. The weakest price performance is forecast for Perth ( 2%), Canberra (+1%) and Darwin (+2%). Perth and Darwin will be influenced by the impact of declining resource sector investment on the state economies, while Canberra is expected to be affected by a combination of cuts to public sector employment and a sizeable oversupply. In real terms, most capital cities are forecast to experience a decline in prices over the next three years, and this will help to set the pre-conditions for a stronger upturn in the next cycle following the end of the forecast period. Table 1: Median house prices by capital city Quarter Sydney Melbourne Brisbane Adelaide Perth Hobart Canberra Darwin ended June $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var $ 000 % Var Forecast Total forecast growth 2014 to 2017 (%) Source: Real Estate Institute of Australia, Forecasts: BIS Shrapnel

7 October Economic outlook 2.1 State of play After recording 1.1% seasonally adjusted growth in the March quarter 2014, real gross domestic product (GDP) growth stepped down in the June quarter to 0.5%, bringing the annual growth rate to 2.9% in 2013/14. This is compared to an average of 3.5% per annum prior to the Global Financial Crisis (GFC). The muted performance is expected to continue over the next 12 months as the effects of a decline in mining investment come through. Partially offsetting this will be continued strong growth in exports (although the rate of export growth will ease from here) and residential investment. Further declines in public, non-dwelling and infrastructure construction are anticipated over the next year, while recurrent government spending is also likely to remain subdued. In addition, consumer spending has fallen due to weakening consumer confidence following the release of the 2014/15 Federal Budget. At the same time businesses are focusing on cost cutting by deferring investment and discretionary expenditure to remain competitive, given the strength of the dollar. As a result, the structural shift back towards broad-based growth is taking time to emerge due to the delayed recovery in non-mining business investment. The economy is expected to grow below its long-run average over the next 12 to 18 months. Home building has been well below demographic demand across Australia for some time, which has resulted in an ongoing deficiency of housing stock. Low interest rates, combined with the chronic deficiency of stock, tight rental vacancies and rising rents have laid the foundations for a solid recovery in new dwelling construction. This is now building momentum and will be a key driver of growth in domestic demand. As businesses demand for labour stays soft due to slower growth in output and subdued private business demand, employment growth is poised to remain weak into early The unemployment rate is forecast rise from 6.1% in August 2014, to a peak of 6.3% by the end of 2014 and into early 2015, with labour force growth expected to continue to outpace that of employment. Retail sales have slowed in line with weakening consumer confidence, which declined sharply in May in response to the Federal Budget. According to the Westpac-Melbourne Institute Consumer Confidence Index, consumers were at their most pessimistic since mid Inflation is expected to be within the Reserve Bank of Australia (RBA) s 2% to 3% target range through to the June 2015 quarter. With economic growth expected to be below trend over the same period, the RBA is expected to keep interest rates on hold through to at least the middle of 2015.

8 8 Australian Housing Outlook Emerging underlying inflation pressures are expected to prompt the RBA to start raising interest rates in late 2015 as economic growth strengthens and, with it, employment growth. Even with the limited growth expected in the short term, spare capacity in the economy should be progressively absorbed. The extended period of underinvestment since the global financial crisis (GFC), should result in businesses needing to re-invest in additional and productivity-enhancing capacity. Public sector investment is also likely to rise as the Federal and State Governments next round of large infrastructure projects (including the North West Rail Link and extension of the M4 in Sydney, and the East-West Link in Melbourne) commence. The unemployment rate is forecast to begin to tighten from the middle of Steady and successive increases in interest rates are forecast to see the standard variable rate peak at 6.8% through 2016/17, temporarily curtailing the recovery in dwelling investment, slowing growth in household expenditure and producing a decline in business investment Chart 1: Key economic indicators Per cent GDP Growth Employment Growth CPI Growth Unemployment Rate Forecast Year to June Source: Australian Bureau of Statistics, Forecasts: BIS Shrapnel Employment growth to August and unemployment rate as at August

9 October Interest rates Standard variable rate With the unemployment rate rising through 2014 and wages growth also muted, inflationary pressures over 2014/15 are likely to be benign. While the Australian dollar is below its peak, its impact on inflation has been limited so far, with the soft economy keeping a lid on price rises. It appears the RBA is prepared to cut interest rates further if the economy loses additional momentum and the unemployment rate continues to rise. However, there are likely to be concerns surrounding the impact this will have on house price growth and housing affordability. Ideally, lower interest rates would translate to greater consumer spending and investment, rather than higher house prices. Minutes of RBA meetings appear to reflect the concern over house prices, with the Governor of the RBA in recent presentations talking down purchaser expectations of indefinite price growth. Talking down the housing market could be a move to pave the way for additional cuts to interest rates, although at this stage it is likely that no further cuts to rates are required. The RBA appears comfortable with the trajectory of the non-mining sectors of the economy and their potential to pick up the baton of growth from declining resource sector investment. Consequently, the cash rate is forecast to remain at the 2.5% set in August 2013, with the possibility of further cuts if the economy continues to soften. When the economy starts to show signs of recovery through the latter half of 2015, the RBA is expected to look to tighten monetary policy. As economic growth gains momentum, improving employment conditions are expected to begin to result in wage-cost inflationary pressures. Importers will gain pricing power and increasingly pass on the costs of the lower Australian dollar. As a result, successive rises are forecast, taking the standard variable rate to a peak of 6.8% by the end of This is expected to bring about the necessary slowdown in the economy in order to alleviate inflationary pressure. Chart 2: Interest rates and inflation Percentage Forecast Cash Rate Standard Variable Rate Three year fixed rate As at June Source: Australian Bureau of Statistics, Reserve Bank, Forecasts: BIS Shrapnel

10 10 Australian Housing Outlook Other lending rates Mortgage interest rates are typically reported in terms of the standard variable rate. However, banks and other lenders also offer other lower interest rate options to borrowers, which in turn result in increased affordability (or greater purchasing power). The gap between three-year fixed rates and the standard variable rate was at its maximum level at June 2013, with the three-year fixed rate being 101 basis points below the standard variable rate, or around 5.15% at June Three-year fixed rates are now factoring in an expected tightening in the interest rate cycle, with the margin below the standard variable rate narrowing to around 75 basis points by September At the same time, fixed rate loans fell from 19% of owner occupier lending at June 2013 to 14% in the three months to July Banks also offer a discount to the standard variable rate to selected customers depending on size and characteristics of the loan. The RBA quotes an indicative discount of 85 basis points on the standard variable rate. However, this can exceed 100 basis points to selected mortgagors, taking the lending rate well below 5%. These lower interest rates have increased the capacity of purchasers to pay, with Chart 3 showing affordability still at 2002 levels nationally for loans at the discounted variable rate. Moreover, given discounted rates are likely to apply to those in stable employment and on higher incomes, they will favour those purchasing dwellings in the middle to upper price ranges. This is typified by the price performance in the inner and middle suburbs of the capital cities (as highlighted in the capital cities section of this report).

11 October Chart 3: Affordability*, standard variable rate and discounted variable rate, Australia Per cent Discounted variable rate Standard variable rate Standard variable rate - affordabilty at 2003 levels Discounted variable rate - affordabilty at 2002 levels Brief period of record low interest rates As at June quarter Source: Australian Bureau of Statistics, Reserve Bank, Forecasts: BIS Shrapnel * based on mortgage repayments on 75% of the median house price as a percentage of household disposable income.

12 12 Australian Housing Outlook The rise of investors The strength in many of Australia s housing markets during the past 12 months has been characterised by the increased presence of investor purchasers in the market. The value of finance for residential investment has been steadily rising from just under 40% of total residential finance in the year to June 2011, to 45.2% in the year to June 2014 (Chart 4). The monthly share has consistently been in the 45% to 50% range since March The low interest rate environment has narrowed the gap between rental income and mortgage outflows for investors, while recent price rises have encouraged the expectation of further capital growth. With low returns being offered by other investment classes such as fixed interest, current conditions have provided an attractive environment for investors. While the rise in investor demand has generally been broad based, there are still noticeable differences in the strength of investor demand across the states. This is highlighted in Section 3.4. Chart 4: Share of loans to residential purchasers by purchaser type, Australia 50.0 Share of total residential loan value First Home Buyers Non-First Home Buyers Investors Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Year ended month Source: Australian Bureau of Statistics

13 October

14 14 Australian Housing Outlook Buyer activity 3.1 Current trends Chart 5 illustrates the monthly year-on-year percentage change in residential lending to first home buyers, nonfirst home buyers (i.e. upgraders and downsizers, which encompass all purchases made for owner occupation and where the buyer has previously owned another dwelling) and investors. The graph represents trends for Australia, which masks some differences occurring across the states that are outlined later in this report. The chart suggests that first home buyer demand continued to decline after showing signs of steadying in the first half of In comparison, the rate of growth in non-first home buyer demand has been slowing since the end of 2013, although there are signs this may have been just a pause and activity is again picking up. In contrast, investor demand has been showing consistent year-on-year growth since the start of 2012 and the value of lending has continued to show monthly year-on-year growth exceeding 20% through Chart 5: Annual growth in home loans percentage change on same month the previous year, Australia Percentage First Home Buyers Non-First Home Buyers Investors Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Investor activity based on value of lending, owner occupier data based on number of loans Month Source: Australian Bureau of Statistics

15 October First home buyers Incentives available First home buyer demand is important as it creates demand for entry level properties, which then facilitates broader demand by encouraging current occupiers to upgrade through the value chain. As a result, governments have often used incentives to promote first home buyer demand during times of market weakness. Table 2 shows the total State and Federal Government incentives offered to first home buyers since It refers to grants available specifically to first home buyers and not broader grants and incentives that first home buyers can also take advantage of. Where stamp duty concessions are offered, the maximum concession is indicated. Purchase price limits for grant eligibility have changed during this period and the incentives shown are for dwellings purchased below the price limit in place at the time. Over the last three years there have been progressive changes in first home buyer incentives across all states and territories to favour purchasers of new homes over existing homes. The long-term impact will be a shift of some first home buyer demand that would have otherwise been for established homes into the new home market, thereby adding to supply. However, there has been a short-term impact on the market as incentives for the purchase of established dwellings have been progressively removed: Future first home buyer demand has been brought forward to take advantage of the grants before they expire, leaving a vacuum of first home buyers in the established market immediately afterwards. There has been a delay in the next round of first home buyers who now have to accumulate a larger deposit to compensate for the lack of financial assistance. The impact across the states has differed in line with the level of incentives being offered. An examination of Table 2 suggests the biggest losses in incentives for established homes from their recent peaks have been in New South Wales (total reduction of $25,000), Northern Territory (reduction of $21,700) and Queensland (reduction of $13,700). It is also these states that experienced the sharpest declines in loans to first home buyers from their previous peak (Chart 6). Interestingly, Victoria has been experiencing sharp falls in first home buyer demand since the middle of This is despite the $7,000 First Home Owner s Grant being replaced by a commensurate increase in the stamp duty concession. This would imply that a cash incentive has a greater impact than a similar sized non-cash incentive such as stamp duty savings. It may also explain the success of the First Home Owner s Grant Boost Scheme in In the Australian Capital Territory (ACT), removal of the $7,000 First Home Owner s Grant in September 2013 has resulted in loans to first home buyers declining. Although more recent reductions to first home buyer incentives in Western Australia (WA), South Australia (SA) and Tasmania have seen activity initially rise, signs of a downturn in loans have emerged in the months following the reduction.

16 16 Australian Housing Outlook Table 2: Time line of first home buyer incentives by state STATE NSW STATE VIC STATE QLD STATE SA STATE WA STATE TAS STATE NT DWELLING TYPE New Established DWELLING TYPE New Established DWELLING TYPE New Established DWELLING TYPE New Established DWELLING TYPE New Established DWELLING TYPE New Established DWELLING TYPE New Established GRANT First Home Owner Grant First Home Owner Grant Boost Scheme New Home Buyers Supplement First Home Plus Scheme First Home - New Home Scheme Total First Home Owner Grant First Home Owner Grant Boost Scheme First Home Plus Scheme Total GRANT First Home Owner Grant First Home Owner Grant Boost Scheme First Home Bonus First Home Owner Regional Bonus Stamp Duty Concessions Total First Home Owner Grant First Home Owner Grant Boost Scheme First Home Bonus Stamp Duty Concessions Total GRANT First Home Owner Grant First Home Owner Grant Boost Scheme Regional First Home Owner Grant Stamp Duty Concessions Total First Home Owner Grant First Home Owner Grant Boost Scheme Stamp Duty Concessions Total GRANT First Home Owner Grant First Home Owner Grant Boost Scheme First Home Concession First Home Bonus Grant Total First Home Owner Grant First Home Owner Grant Boost Scheme First Home Concession First Home Bonus Grant Total GRANT First Home Owner Grant First Home Owner Grant Boost Scheme Stamp Duty Concessions Total First Home Owner Grant First Home Owner Grant Boost Scheme Stamp Duty Concessions Total GRANT First Home Owner Grant First Home Owner Grant Boost Scheme First Home Builder Boost Stamp Duty Concessions Total First Home Owner Grant First Home Owner Grant Boost Scheme Stamp Duty Concessions Total GRANT First Home Owner Grant First Home Owner Grant Boost Scheme Stamp Duty Concessions Total First Home Owner Grant First Home Owner Grant - Non Urban Area First Home Owner Grant Boost Scheme Stamp Duty Concessions J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $7K $7K $14K $7K $3K $3K $3K $18K $18K $18K $18K $18K $25K $42K $35K $28K $25K $7K $7K $7K $7K $7K $3.5K $18K $18K $18K $18K $25K $32K $28.5K $25K J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $7K $7K $7K $7K $14K $14K $7K $5K $5K $5K $11K $11K $11K $13K $3K $3K $4.5K $4.5K $4.5K $6.5K $12K $15K $29K $36.5K $29.5K $22.5K $26.5K $7K $7K $7K $7K $7K $7K $7K $7K $3.5K $3K $3K $2K $2K $2K $12K $17K $16K $12.5K $9K $7K J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $7K $7K $14K $7K $4K $8.8K $8.8K $8.8K $8.8K $8.8K $15.8K $29.8K $22.8K $15.8K $19.8K $7K $7K $7K $7K $7K $3.5K $8.8K $8.8K $8.8K $8.8K $15.8K $22.8K $19.3K $15.8K J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $7K $7K $14K $7K $2.1K $4K $4K $4K $4K $9.1K $11K $25K $18K $11K $7K $7K $7K $7K $7K $7K $3.5K $2.1K $4K $4K $4K $4K $9.1K $11K $18K $14.5K $11K J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $14K $7K $17.8K $17.8K $17.8K $24.8K $38.8K $31.8K $7K $7K $7K $7K $3.5K $17.8K $17.8K $17.8K $24.8K $31.8K $28.3K J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $7K $14K $7K $4K $4K $4K $4K $11K $25K $18K $11K $7K $7K $7K $7K $7K $3.5K $4K $4K $4K $4K $11K $18K $14.5K $11K J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J $7K $7K $7K $7K $7K $14K $7K $15.5K $15.5K $15.5K $15.5K $26.7K $22.5K $36.5K $29.5K $22.5K $33.7K $7K $7K $7K $7K $7K $15.5K $7K $3.5K $15.5K $15.5K Total $22.5K $29.5K $26K $22.5K $33.7K DWELLING STATE TYPE GRANT J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J First Home Owner Grant $7K $7K $7K New First Home Owner Grant Boost Scheme $14K $7K Total $15.4K $21K $14K ACT First Home Owner Grant $7K $7K $7K Established First Home Owner Grant Boost Scheme $7K $3.5K Total $15.4K $14K $10.5K Note: Grants included are those only available to first home buyers. Grants available to first home buyers and non-first home buyers are not included Note: Stamp Duty Concessions refers to the saving on the highest threshold value where no stamp duty is applied. They are only indicative as for some states we were not able to assertain the highest threshold value or duty rate at a particular time to workout the exact sa $15.5K $26.7K

17 October Table 2: Time line of first home buyer incentives by state (continued) Future Expiry/Changes A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $7K $7K $15K Falls to $10K from Jan '16 $18K $18K $20.2K $25K $25K $27.5K $7K $7K $20.2K $35.2K $18K $25K $7K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $7K $7K $7K $10K $10k Future Expiry/Changes $13K $13K $6.5K $6.5K $6.2k $6.2K $9.3K $26.5K $32.7K $13.2K $16.3K $7K $7K $7K $12.4K $22.4K $15.5K $25.5k $6.2K $9.3K $7K $13.2K $16.3K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $7K $7K $15K $12.4K $12.4K $15.5K $15.5k Future Expiry/Changes $4K $8.8K $15.5K $19.8K $22.5K $7K $7K $7K $7K $8.8K $23K $8.8K $15.5K $15.8K $22.5K $7K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $15K $8.8K $8.8K Future Expiry/Changes $8K $15K $7K $15K $5K $7K $5K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $10K $10K Future Expiry/Changes $17.8K $24.8K $7K $17.8K $14.4K $27.8K $24.4K $3K $3K $17.8K $17.8K $14.4K $24.8K $21.8K $17.4K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $7K Future Expiry/Changes $4K $11K $7K $7K $7K $15K $30K $15K $30K Reduced to $20K from Jan 2014 and $10k from Jul 2015 $4K $11K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7K $7K $25K $26K $7K Future Expiry/Changes $26.7K $26.7K $33.7K $43.7K $7K $7K $25K $26K $12K Removed from 1 July 2015 $13K Removed from 1 July 2015 $26.7K $26.7K $33.7K $33.7K $25K A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O $7k $12.5K Future Expiry/Changes $7k $12.5K $7k $7k r duty rate at a particular time to workout the exact saving

18 18 Australian Housing Outlook However, with first home owner demand being fixed (i.e. most households are a first home buyer at some stage), incentives do not create or diminish demand but rather serve to shift existing demand around over time. Once the impacts of the changes to incentives are worked through, first home buyer demand should return to long-term averages. With New South Wales (NSW), Queensland and, to a lesser extent, the Northern Territory (NT) being the first states to reduce incentives to first home buyers of established dwellings, this is evident in the emerging recovery in first home buyer demand in these markets. The data on loans to first home buyers provided by the Australian Bureau of Statistics (ABS) are derived from returns submitted to the Australian Prudential Regulation Authority. First home buyers are defined as a borrower entering the home ownership market for the first time. Consequently, it encompasses all loans to first home buyers and not just those eligible for grants. It also excludes first home buyers who are investors as the data are provided in relation to loans for owner occupation. Chart 6: Number of loans to first home buyers by state, moving annual totals 70,000 60,000 50,000 NSW VIC QLD WA FHOG Boost Scheme 3,500 3,000 2,500 FHOG Boost Scheme Major policy changes 14,000 12,000 10,000 40,000 Major policy changes 2,000 8,000 30,000 1,500 6,000 20,000 10,000 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 1, Jun-07 Dec-07 Jun-08 TAS NT ACT SA (RHS) Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 4,000 2,000 0 Source: Australian Bureau of Statistics

19 October Upgraders (and downsizers) Upgraders and downsizers represent the largest component of residential demand, at around two to three times the size of the first home buyer market, and currently represent around 45% of total residential lending activity. In particular, upgrader demand has been strengthening since bottoming out in 2011 or 2012 in all states. However, Victoria is the only state where the number of loans to upgraders is exceeding the pre-gfc levels of 2007, with NSW and the ACT the only other states reporting upgrader activity close to 2007 levels. The solid growth apparent in loans to upgraders in NSW, Victoria and the ACT in 2013/14 has been joined by healthy rises in Queensland, Tasmania and SA, although the latter states are still tracking at historically low levels of demand. Should this trend continue, the increase in activity is likely to translate to stronger price growth emerging in these markets. In contrast, loans to upgraders have only recorded more modest rises in WA and the NT. Despite strong price growth in both Perth and Darwin in 2013, it was investor activity in both states (and first home buyer activity in WA) that drove change. Price rises in both capital cities are now slowing over 2013/14. Chart 7: Number of loans to upgraders and downsizers by state, moving annual totals 120, ,000 80,000 NSW VIC QLD WA 10,000 9,000 8,000 7,000 6,000 TAS NT ACT SA (RHS) 35,000 30,000 25,000 20,000 60,000 5,000 4,000 15,000 40,000 3,000 10,000 20,000 2,000 1,000 5,000 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 0 Source: Australian Bureau of Statistics

20 20 Australian Housing Outlook Investors The ABS provides data on residential investment in terms of the value of total loans rather than the number of loans. As a result, changes in the value of loans over time reflect both a change in values for property as well as purchaser volumes. With the exception of Tasmania, where investment activity has been flat, and the ACT where an annual 6% decline was recorded, all states reported an increase in lending for residential investment in 2013/14. Noticeably, growth in investment lending has been strongest in NSW in 2013/14, rising by 43% over the previous year to $49 billion. This ended a decade-long period of subdued demand for residential investment finance in the state since 2003/04. Of the other states, lending for residential investment is above previous record levels in Victoria and the NT, with investor activity in WA on par with its pre-gfc levels. Conversely, while rising in 2013/14, lending for residential investment in Queensland and SA remains below pre-gfc levels. This has contributed to the more delayed upturn in the state capitals of Brisbane and Adelaide. Chart 8: Value of loans to investors by state, $billion, moving annual totals NSW VIC QLD WA TAS NT ACT SA (RHS) Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun Source: Australian Bureau of Statistics

21 October Rental markets 4.1 Vacancy rates The vacancy rate in each city reflects the level of rental oversupply or deficiency. A vacancy rate of 3% in a market is considered balanced, where rents on average will rise roughly in line with inflation. Although rising in the year to June 2014 to 2.4%, vacancy rates in Brisbane have been below 3% since 2011 and reflect a tight market. Vacancy rates in Sydney have also been consistently tight and below 3% since Interestingly, Melbourne s vacancy rate has tightened from 3.4% at June 2013 to 2.8% at June 2014, reversing the steadily rising trend since This is despite the high level of new dwelling activity taking place. Migration (both overseas and interstate) into Victoria is very strong and working to offset the addition of new supply. Vacancy rates in Perth have followed cycles in both mining investment and supply, tightening from 4.3% at June 2010 to 1.9% in June 2012, before rising again to 4.2% at June While new dwelling completions have been rising, population numbers would suggest an overall dwelling deficiency is still in place. Consequently, the rise in vacancy rates could reflect the time taken to back fill rental stock. Strong first home buyer numbers in the State and falling migration levels are causing an exit from rental properties, and the pace of new rental tenants coming to the market may be failing to keep up. Alternatively, the nature of temporary overseas migration into WA may suggest these population flows haven t necessarily translated into lasting demand for housing. Vacancy rates in Adelaide and Hobart have been tightening from levels well above 3% as at June The attractive incentives to first home buyers in both these states for new construction (and SA offers an additional incentive for new construction for all market segments) are contributing to a recovery in new dwelling activity. There is a risk that vacancy rates will trend upwards again over 2014/15 as these dwellings work their way through to completion. Canberra and Darwin s rental vacancy rates have risen over the year to be above 4% at June Record levels of new apartment commencements in recent years are now translating to new rental supply, with the NT market estimated to be shifting from an estimated deficiency into oversupply over 2014/15. The ACT is estimated to be already experiencing a rising excess of dwelling stock. Chart 9: Residential vacancy rates Per cent Balanced market = 3% Per cent Adelaide Hobart Canberra Darwin Sydney Melbourne Brisbane Perth Balanced market = 3% Source: Real Estate Institute of Australia

22 22 Australian Housing Outlook Rental growth Rental growth was strong in the latter half of the 2000s after a period of underperformance in the first half of the decade. In more recent years, rental growth has generally been more moderate, despite vacancy rates remaining tight in many capital cities. This suggests that there may be some rental affordability constraints preventing stronger rises. In particular, rental growth has slowed to around 2% in Melbourne, Brisbane, Adelaide and Hobart, which is below the level of inflation. In Melbourne, Adelaide and Hobart, this reflects vacancy rates at or around the balanced market rate of 3%, while in Brisbane it may be an indication of current economic and employment conditions. Rental growth in Sydney has also slowed, although not to the same extent, to 3.0% in 2013/14. Rental growth in both Perth and Darwin has slowed to 2.9% and 4.8% respectively in 2013/14 after both recording 7.5% increases in 2012/13. The strong growth occurred in response to low vacancy rates, a strong state economy and healthy employment conditions. However, supply is now rising in both states, while migration and underlying demand is slowing and resource sector investment is weakening. As a result, lower rates of rental growth are expected in 2014/15. Rents in Canberra have actually fallen by 0.8% in 2013/14, reflecting the high level of vacancy rates. Chart 10: Annual rental growth Per cent Sydney Melbourne Brisbane Perth Per cent Adelaide Hobart Canberra Darwin Source: Australian Bureau of Statistics

23 October Yields Chart 11 shows movement in indicative rental yields for houses by capital city. This figure is calculated by the median three-bedroom house rent divided by the median house price. The indicative yield slightly understates actual yields, as the median three-bedroom rent is calculated for investment houses, which would typically be priced below the median house price. Nevertheless, movement in the indicative yield should correspond with actual yields. A comparison is made with the standard variable interest rate to compare the rental return with the cost of financing. With the exception of Adelaide, where yields were steady, indicative yields have deteriorated across all other capital cities in 2013/14. However, the causes vary. Yields in Sydney, Melbourne and Brisbane fell due to solid price growth, while weaker rents contributed to lower yields in Perth, Hobart, Canberra and Darwin. In Sydney and Perth, yields still remain considerably higher than the levels of the early to mid 2000s. For Brisbane, yields have been relatively steady since their low point in 2004, although well below levels at the start of the decade. Indicative yields in Melbourne have fallen below 3% for the first time since at least Adelaide, Hobart, Canberra and Darwin typically have higher yields than Sydney or Melbourne. Like Brisbane, yields are generally lower than at the start of the 2000s, perhaps reflecting a sustained shift in these markets response to a lower interest rate environment. Being such a small and volatile market, Darwin has the highest indicative yields of the capital cities. Despite the low indicative yields, low mortgage interest rates mean the gap between rental yields and interest rates in most capital cities remains narrow in a long term sense. In some instances, selected properties in individual markets are also likely to be positively geared, particularly where discounted mortgage rates are on offer. This narrowed gap, together with the emergence of capital growth in many capital cities in 2013/14, is expected to remain attractive to investors and drive further increases in investor demand across most states over 2014/15 Chart 11: Standard variable interest rate and indicative rental yields by capital city, houses 10.0 Per cent 10.0 Per cent Sydney Melbourne Brisbane Perth Variable rate Adelaide Hobart Canberra Darwin Variable rate Source: Real Estate Institute of Australia, Reserve Bank

24 24 Australian Housing Outlook Housing affordability Although affordability deteriorated markedly in Sydney and Melbourne over 2013/14, the result was generally more benign across the other capital cities, with affordability remaining mainly steady or even improving slightly. The strong price growth in both cities more than offset the impact of the 25 basis point reduction in interest rates over the year. Affordability in Sydney in 2014 is close to 2002 levels; a period where prices were rising. In contrast, affordability in Melbourne is becoming increasingly challenging and is now slightly below 2007 levels. While price growth in Melbourne was still occurring at this time, further rises to interest rates started to slow the market. Consequently, from an affordability perspective, it appears the market can accommodate further price rises in these cities at current interest rates. The prospect for further price growth and interest rate rises by 2017 however, as indicated by BIS Shrapnel s forecasts in this report, will take affordability in Sydney to early-mid 2000s levels, and Melbourne to 2008 and 2010 levels. These sets of conditions both precipitated price corrections. There is the potential for a price correction to happen again, although any decline is likely to be in low single digit percentage terms as has occurred previously. Nevertheless, in real terms, the decline would be larger. More modest price rises in the other capital cities suggest affordability at current interest rates is commensurate with previous levels that have accommodated price growth. Consequently, additional growth in these cities has the potential to come through depending on the dwelling stock balance and economic conditions in the state. Moreover, despite the forecast peak in variable rates of 6.8% in 2016/17 outlined in this report, it does not appear affordability in these capital cities will reach a level by then that would precipitate any major price declines. Chart 12: Mortgage repayments on a median priced home* as a proportion of monthly disposable household income Percentage Sydney Melbourne Brisbane Perth Forecast As at June

25 October Chart 12 (cont.): Mortgage repayments on a median priced home* as a proportion of monthly disposable household income Percentage Adelaide Hobart Canberra Darwin Forecast As at June Source: Australian Bureau of Statistics, Reserve Bank, Real Estate Institute of Australia, Forecasts: BIS Shrapnel * Mortgage repayment based on 75% of the median house price

26 26 Australian Housing Outlook Demand Underlying demand for new dwellings is driven primarily by population growth which, at the state level, comes from the combination of natural increase (births less deaths) and net overseas and net interstate migration flows. In particular, demand from net overseas and net interstate migration is more immediate as this group will require accommodation upon arrival, be it owner occupation or rental. 7.1 Overseas migration Net overseas migration into Australia peaked at 315,000 in the year to December As well as permanent migration, the strong inflow was largely due to growth in temporary (although long-term) overseas migrants, predominantly those on student or skilled temporary (subclass 457) visas. The correction through to 2010 (with national net overseas migration falling to 172,000 persons) was not only caused by the decline in arrivals resulting from weaker local economic conditions, but also rising long-term departures as temporary migrants that drove earlier record net overseas migration returned to their country of origin. The recovery to a net overseas migration of 242,800 in 2012/13 was underpinned largely by a rebound in arrivals, which surpassed the previous peak. However, with arrivals now trending downwards as resource sector investment and the Australian economy slows, net overseas migration flows have weakened to 235,800 in the year to December This trend is forecast to accelerate over the next three years. Arrivals will slow and departures should increase due to the lack of opportunities for temporary migrants to extend their stay. As a result, it is forecast that net overseas migration is forecast to ease to 150,000 persons nationally by 2016/17. While well down since the peak in 2009, it is higher than all but one year prior to 2006/07 Chart 13: Arrivals and departures (movements) and net overseas migration (persons), moving annual totals, Australia 450 Persons ('000s) Persons ('000s) Permanent and long term departures Net Overseas Migration Permanent and long term arrivals (RHS) Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Source: Australian Bureau of Statistics, BIS Shrapnel Year Ending

27 October With the most recent peak in net overseas migration in 2012/13 fuelled by the rise in subclass 457 visa entrants, the main beneficiaries have been WA and the NT. These states experienced the greatest skills shortages emerging from their high level of resource sector investment and also witnessed record net overseas migration in 2012/13. While all states are forecast to experience a fall in net overseas migration inflows through to 2016/17, in line with the national total, the greatest declines will be felt in the resource sector states (WA, the NT and, to a lesser extent, Queensland). It is believed the high concentration of temporary migration will result in increased outflows as investment projects wind down and employment slows. In contrast, net overseas migration in the states that have benefited less from temporary migrants including NSW, Victoria, SA, Tasmania and the ACT should experience a softer decline. Chart 14: Annual net overseas migration by state Persons ('000s) NSW VIC QLD WA Forecast Persons ('000s) TAS NT ACT SA (RHS) Persons ('000s) 20.0 Forecast e Source: Australian Bureau of Statistics, BIS Shrapnel Year ended June e Source: Australian Bureau of Statistics, BIS Shrapnel 0.0 Year ended June

28 28 Australian Housing Outlook Interstate migration The main drivers of migration between the states are relative housing affordability and economic conditions. Reduced interstate movement also generally occurs when economic conditions deteriorate overall, i.e. limited job prospects elsewhere encourage people to stay where they are. Queensland s net interstate migration inflow has been at long-term lows in recent years, reflecting a period of both high relative house prices and weak economic performance. However, interstate migration is expected to begin to recover from 2014/15. This is in response to improved relative house price affordability following recent weak price growth in comparison to the stronger southern states. After falling markedly since peaking in 2003, the NSW net interstate outflow has improved but, as with 2003, rising house prices and deteriorating affordability in Sydney are likely to see the outflow increase. Victoria s net inflow has also improved to record levels, estimated at 8,000 persons in 2013/14. However, with the State facing economic headwinds and a higher unemployment rate than the national level, the net inflow is likely to ease from 2014/15. Weakening employment conditions as resource sector investment winds down is forecast to see WA s net interstate migration inflow revert to an outflow, while spending cuts to the public sector in the ACT is having the same effect there. The SA and Tasmanian net interstate migration outflows are likely to persist, though inflows into Tasmania may benefit from rising mainland house prices. The NT is currently experiencing a net interstate migration outflow despite the level of resource sector investment taking place. It could be that the high net overseas migration into the Territory has been accommodating the necessary skills requirements, leaving little demand for labour from interstate. Nevertheless, numbers have improved from a peak net outflow in 2010/11 and it is expected that the high level of investment activity will see this trend continue. Chart 15: Annual net interstate migration by state Persons ('000s) NSW VIC QLD WA Forecast Persons ('000s) 3.0 TAS NT 2.0 ACT SA 1.0 Forecast e Source: Australian Bureau of Statistics, BIS Shrapnel Year ended June e Source: Australian Bureau of Statistics, BIS Shrapnel Year ended June

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